US and European stocks dived broadly, while their Asian peers were mixed after the Federal Reserve reduced its growth forecast for the largest economy and kept stimulus measures. US major stock indices lost about 0.6-0.7% yesterday. In foreign exchange markets Swiss franc rocketed yesterday on risk aversion, while higher-yielding currencies such as Australian and Canadian dollars fell against the US dollar.
US Dollar
The dollar strengthened against its major peers after the Fed left yesterday its benchmark interest rate at a record low 0%-0.25%, as economists expected and damped speculation of additional stimulus. But the currency gained ground mainly due to a revised forecast for the US economic growth from the central bank. The Fes’s growth forecast for 2011 was reduced from 3.1%-3.3% to 2.7%-2.9%, while growth in 2012 is expected to be in a range 3.3%-3.7% instead of 3.5%-4.2%. Bernanke said during his press conference after the meeting that some reasons of a slowdown are temporary, such as high commodity prices and earthquake in Japan, but others, like home prices fall or financial sector weakness may be more steady. At the same time Bernanke said that “inflation will subside, as the effects of past energy and other commodity price increases dissipate.” In May consumer prices advanced to a 3.6% annual rate – the highest since October 2008, while the core CPI was at 1.5%. Finally the central bank raised its unemployment forecast range to 8.6%-8.9% in the last quarter of 2011, compared with an earlier projected 8.4%-8.7% range. Bernanke concluded that the economy “is recovering at a moderate pace, though somewhat more slowly” than the central bank had expected. He added that “we believe we’re at least two or three meetings away from taking any further action…but depending on how the economy evolves, and inflation and unemployment, it could be significantly longer.”
Euro
The euro weakened before European leaders begin today a two-day meeting to discuss Greek financial bailout. The euro extended yesterday’s losses against the dollar on concerns Greek Prime Minister Papandreou will face difficulty, while trying to pass his budget cuts program through parliament next week in order to receive financial aid from the EU and IMF in July. The leader of the parliament opposition party Samaras, said he would not support new austerity measures, contrary to European Union calls for unity, according to Financial Times. Also yesterday the president of the European Central Bank Trichet said that financial instability in the euro zone threatens to infect banks. The single currency fell below 1.43 in Asian trading hours today after touching yesterday a week high against the dollar at 1.4441.
British Pound
The pound fell against the US dollar to its lowest level since April 1 – 1.6017 – after loosing yesterday 200 points, as minutes released from the Bank of England’s most recent meeting showed seven policy makers voted to keep interest rates at a record low. Moreover some of them support possibilities of new bond purchases to counter weaker growth and inflation. The central bank kept its benchmark rate at 0.5% on June 9 to support the economy. However inflation in the UK accelerated last month to a fastest pace since October 2008 – 4.5%, exceeding by more than twice the central bank’s target. Nevertheless the central bank’s governor King said last week that the current price surge is temporary.
